Insight,

APRA’s report on CBA: Key takeaways for Boards

AU | EN
Current site :    AU   |   EN
Australia
Belgium
China
China Hong Kong SAR
Germany
Italy
Japan
Singapore
Spain
UAE
United Kingdom
United States
Global

This article was written by Shabarika Ajitkumar and Joseph Muraca.

In August 2017, APRA commissioned a Panel to conduct a prudential inquiry into CBA to examine its governance, culture and accountability frameworks. This followed recent incidents involving CBA including AUSTRAC's legal action in connection with alleged AML breaches as well as other conduct-related matters. The Panel published its findings in a Report in early May 2018 that can be found here.

The Report (and its recommendations) should be viewed through the lens of the strict prudential regulatory regime for banks and the need for banks to consider the interests of deposit holders as well as shareholders. However, the Report is still relevant for other companies and sectors.  Following release of the Report, the Federal Treasurer even suggested the report should be the next item on the agenda of every board meeting. 

At its core the Report reinforces that Boards should avoid 'group think' and not be passive.  That involves testing management appropriately, holding management to account for performance, taking an active role in setting the scene for culture and risk management and actively setting expectations as to what is reported to directors and how.

Adopting all of the recommendations in the Report is likely to require longer board meetings with more debate and discussion of non-financial risks.  Whether the report accurately reflects the true distinction between the role and function of a non-executive director and the executive is a matter for debate.  

The following table sets out the key takeaways for Boards from the findings in the Report.

Key Takeaways

Observations

Adequate oversight of non-financial risks

The Panel observed that there was inadequate oversight and challenge by the Board (and its Committees) of non-financial risks and, in particular emerging risks.  In addition, material or 'red flag' risks were kept open for too long suggesting a failure to properly monitor risks when they had been identified. 

All companies and business face risks.  The critical points raised by the Report are to ensure there is an appropriate balance and focus in identifying material risks and addressing them as quickly as possible after they have been identified.

Focus on accountability, including through remuneration outcomes

The Panel emphasised the importance of accountability, particularly for non-financial matters.  It reinforced the need for there to be clear accountability both vertically within business units and collectively among the senior management team for matters that affect the whole organisation.  

Accountability can be reinforced through line managers responsible for material risks having a direct line of communication (and accountability to) the Board.  Remuneration structures and outcomes are also key in driving the right outcomes.  The Panel calls for Boards (including Remuneration Committees) to hold management to account by reducing remuneration outcomes in response to adverse risk management, compliance and customer outcomes – this will, in part, be mandated by law for banks by the new Banking Executive Accountability Regime.  At the same time, Boards should also reward management when good risk outcomes are achieved.  The Panel observed that the CBA Board could have provided greater oversight and further challenged remuneration outcomes, resulting in a more pre-emptive rather than reactive approach when applying risk adjustments to variable remuneration.

There have been recent high profile examples of Boards reducing bonus payments to address behavioural issues.  Reasons why these decisions are made are not always transparent.  The challenge for Boards is not only to take action where needed but also to explain why that action has been taken.  At the same time, prior objections by proxy advisors and institutional investors to so called 'soft targets' for LTIs and STIs should be tempered so that Boards have the flexibility to deal with unexpected behavioural and risk outcomes (both positive and negative).

Active oversight of management and a change in mindset

The Report emphasised the need for Boards to challenge management.  It suggests that Directors should be more active in questioning and challenging management and have more direct contact beyond key executives and be more prescriptive and demanding regarding matters that are reported to the Board.
The Panel suggested that more visibility is needed from Boards so that they can better set the 'tone from the top' and not just leave communications and publicity to the CEO.
This might also warrant a change in mindset that moves from asking 'can we do it?' to 'should we do it?'.  The Report noted an already changed mindset among the CBA Board as an increasing philosophy of "don't tell me, show me".

Better information and delineation of responsibilities between Board Committees

The Panel's findings suggest that more rigour should be applied around what information is provided to Directors with a view to improving the quality of information that is received by Directors.  This is a narrative that has followed key decisions over the last decade from the Centro case to James Hardie.  Courts expect that Directors will seek to control the volume of information provided to them (there is an important role for the company secretary and management here too).  By extension, the Report extols Directors to also be more active in how that information is provided to them.

The Panel's findings also suggest that Board meetings should be timely and dynamic.  In CBA's case, the Report found that historically Board agendas were too static, the CEO and the Chair did not meet often enough to determine agendas, there was not enough attention given to long standing issues (and they were not closed out effectively), there were gaps in communications between Committees (and management), Directors did not push for better reporting and Committee members too often were seen to default to chairs and executives.

The findings also suggested that there should be clear delineation in the roles and responsibilities of Board Committees.

The Report suggests that Directors may need to spend more time in performing their role – especially for large and complex organisations.

LATEST THINKING
Insight
APRA’s new capital framework for ADIs takes effect from 1 January 2023. APRA has just released final Prudential Practice Guides, final reporting standards and an amended APS 113. APRA has also started a short consultation on consequential amendments to NSFR and New Zealand capital requirements. Here is what you need to know.

16 August 2022

Insight
In person and online, stages are being set for the biggest annual event on Australian listed companies’ corporate calendar. What to expect this AGM season? The KWM Corporate M&A team has pulled together a quickfire list of seven points to watch, and five key issues for every company to consider as they prepare…

15 August 2022

Insight
With the promise of cost savings, greater flexibility and ability to scale, it is not surprising that companies are continuing to move their key business applications and data to the cloud.

15 August 2022